A NOTE OF DISSENT ON THE MEMORANDUM OF THE PANEL OF ECONOMISTS

A NOTE OF DISSENT ON
THE MEMORANDUM OF THE
PANEL OF ECONOMISTS*

Prof. B. R. Shenoy

I am unable to subscribe wholly to the views of my colleagues on (1) the Size of the Plan, (2)
Deficit Financing as a means of raising real resources for the Plan, and (3) certain Policy and
Institutional Implications of the Plan Frame. I may set out, briefly, my views on these
subjects.

I. SIZE OF THE PLAN

The Plan Frame is built on the basis of a 25 to 27 per cent, increase in the national
income in five years. The targets of production in the several sectors, which correspond to
this rise in income, would require an increase in net investment (or savings) from 6.75 per
cent of the national income in 1955-56 to 10.95 per cent in 1960-61. This relationship yielded
a figure of a total net investment of Rs. 5,600 crores in five years; Rs. 3,400 crores of this
expenditure would be in the public sector and Rs. 2,200 crores in the private sector.

The total developmental outlay corresponding to a net investment of Rs. 3,400 crores
in the public sector would be Rs. 4,300 crores. Adding to this an expenditure of Rs. 4,500
crores outside the Plan, the total outlay of the Centre and the States would be Rs. 8,800 crores
in five years. The Plan Frame proceeds to finance this expenditure in the following manner:

1. Revenue and other current Receipts at the of 8.5% of the

(Crores of Rupees)

National income

5,200

2. Railway surplus

200

3. Loans and Small Savings

1,000

4. Foreign assistance

5. Additional taxation, compulsory savings, and higher profits

400

from government enterprises

800-1,000

6. Deficit Financing

1,000-1,200

Total

8,800

1

If we separate from the above the total developmental outlay on the Plan (Rs. 4,300
crores) the resources for the public sector of .the Plan would be derived probably as under :

1 .

Loans and Small Savings

(Crores of Rupees)
1,000

2.

Foreign assistance

400

3.

Revenue Surplus on the basis of Revenue Receipts at

4.

the current rate of 8.5% of the national income.
Additional taxation, compulsory savings, and higher

900

profits from government enterprises

800-1,000

5.

Deficit Financing

1,000-1,200

Total

4,300

My colleagues have stated that the increase in investment required for the Plan Frame
is “fairly ambitious” and they “stress that the effort involved in this increase is considerable,
and will strain the economy a very great deal” (para. 7). Earlier however, they have observed
that “given a determined bid to put forth a maximum measure of effort”, the national income
objective, which this rate of increase in investment would yield, “can be attained” (para. 4).
This, to my mind, does not adequately indicate the risks which an investment attempt on this
scale may involve (unless foreign assistance becomes available in an incomparably larger
measure than envisaged in the Plan Frame). To force a pace of development in excess of the
capacity of the available real resources must necessarily involve uncontrolled inflation. In a
democratic community where the masses of the people live close to the margin of
subsistence, uncontrolled inflation may prove to be explosive 1 and might undermine the
existing order of society. In such a background one cannot subsidise communism better than
through inflationary deficit financing. Probably the greatest enemy of the Kuomintang in
China was the printing press. Alternatively, if appropriate “physical measures”, familiar to a
communist economy, were adopted (in an effort to prevent inflation) we would be writing

* Published in The Second Five Year Plan ( 1956-57 to 1960-61 ), Basic Considerations Relating to the Plan
Frame, a Memorandum prepared by the Panel of Economists, Planning Commission (April 1955). This version
is scanned from the publication of Economics Research Centre, 1998.

From the standpoint of social security, the incidence of further inflation on the real incomes of the
Constable in the Police Forces and of the Jawan in the Defence Services should be borne in mind. This aspect of
the matter must not be dismissed lightly under the thought that dearness allowances would provide adequate
compensation. The salary and allowances of a Constable in the Police Force, I understand, varied between Rs.

86 and Rs. 100 p.m.

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off, gradually or rapidly, depending upon the exigencies, of the plan, individual liberty and
democratic institutions by administrative or legislative action. We should be, therefore,
forewarned of the dangers of an over-ambitious plan. A wide gap between targets and
achievements as has been hither to the case with the first plan was a third possibility This
depended, however, upon the rigour with which we may resist temptations for inflationary
finance, and the pressure to encroach upon the liberty of the individual. Such resistance may
prove to be difficult under the natural enthusiasm to reach the targets. It may entail,
moreover, some wastage incidental to a revision (to match in the available resources) of a
plan in progress which had been based on a larger blue print.

The Plan Frame begins by prescribing the increase in national income which the Plan
would set to achieve. Its authors, then, proceed to find the real resources necessary for the
corresponding rate of investment. In making the national budget, it is permissible to
determine expenditure first and then, raise equivalent funds, as the Receipts of the State form
but a part of the total national income. The budget can grow by drawing on the rest. This
procedure cannot be applied to the budget of a Plan, which embraces the entire monetised
saving and investment activity of the nation. Here the availability of real resources must be
assessed first and the investment plan must match it. In a communist economy the volume of
savings may be made to vary within fair limits by restricting allocations to the consumer
trades. Within these limits a communist plan can determine expenditure first, and, then,
proceed to find the requisite resources. In a democratic society the scope for variation in
savings, which is largely the result of individual choices, is comparatively limited.

The availability of real resources must depend on the reliability of the estimates of
saving. Under no circumstances can total net investment (excluding external assistance)
exceed the total net savings of the community. Revenue surpluses, surpluses of State business
undertakings, loans, ploughing back of profits, deficit financing, credit creation, and so on,
are but devices of appropriating the savings of the community for purposes of the Plan. There
is no device of creating real resources which are not saved.

A paper on “Capital Formation in India” supplied to the Panel of Economists
estimates net domestic capital formation India, in the recent past, as under :

Net Domestic Capital Formation in India

(1) (2) (3)

(Rs. in Crores)

Net Domestic Capital National Income 1 as % of 2

3

formation

1948-49

446

8,580

5.2

1949-50

524

9,000

5.8

1950-51

589

9, 500

6.2

1951-52

672

10, 000

6.7

1952-53

659

9,800

6.7

1953-54

71 9

10, 500

6.8

During the first three years of the First Five Year Plan, (1951-52 to 1955-56), net
capital formation, as a percentage of national income was more or less stationary, the increase
in the national income being presumably absorbed, in large part, partly by an increase in the
population and partly by an increase in consumption. Relatively to 1949-50, capital formation
(as a percentage of national income) in 1953-54 rose by 17.24 per cent, an annual increase of
4.56 per cent. Under the Plan Frame net capital formation (10.95%) at the close of the Second
Plan (1.960-61) would be 61.98 per cent higher than (6.75%) at the close of the First Plan
(1955-56) or an annual increase of 12.40 per cent.

The over-ambitious character of the Plan Frame is also reflected in the rate of increase
it aims at in the national income. Allowance being made for favourable monsoons, the
increase in national income during the First Plan is estimated at 12 to 13 per cent, or an
annual increase of 2.4 to 2.6 per cent. The corresponding increase in the Plan Frame is 5 per
cent per annum or 25 to 27 per cent in five years.

Statistics of the growth of national income in certain overseas countries, quoted by the
Plan Frame, show that in Canada, Switzerland and Germany the rate of growth in national
income generally approximated to the rate of growth experienced in India during the First
Five Year Plan. In U.S.A. the rate of growth was 4.5 per cent until 1913 and 3 per cent from
1929 to 1950. Both in per capita income and the capacity to save we are far behind these
countries. In the Soviet Union, Poland, Czechoslovakia, Hungary and Bulgaria, the rate of
growth in recent years is stated to vary between 12 to 16 per cent. If these statistics are
comparable, the more rapid progress of communist economies reflects the relative efficiency
of totalitarian devices.

Judging from our own recent experience, and also the experience of other democratic
countries, the available real resources (savings) for development cannot for sometime be
expected to be of an order that would permit anything like a doubling of the rate of growth in
national income. The current rate of savings in India is generally estimated at 7 per cent or
under of the national income. During the past five years it has risen by about 1 per cent. It

4

would be too optimistic to assume that the rate of increase may be accelerated in the next five
years. A reduction in the inequalities of income distribution, which is the declared policy of
the Government, would tend to reduce overall savings. The consumption of food of the vast
masses of the people being both below the national average and below the minimum
nutritional standards, it has been estimated that about 50 per cent of an increase in consumer
expenditure is liable to be utilised in India on foodgrains. In conformity with traditional
experience, a succession of good harvests, which we have experienced, may be followed by a
couple of years or so of bad or indifferent harvests. Under the circumstances, it may not be
safe to assume a rate of saving of much higher than 8 per cent at the end of the next five-year
period. The possibility of this conjecture proving too high cannot be ruled out. The size of the
Plan needs to be, therefore, revised to match the real resources as indicated by this rate of
savings and the estimate of the rate of increase in national income should be adjusted to
conform to the investment equivalent to this rate of saving.

The rate of increase in income would depend upon the bias of the Plan for labour
intensive schemes and for cottage industries. The probable magnitudes of the investment and
of the growth in income remain to be worked out. This it is not possible to do immediately.
On a rough estimate the order of magnitude of the investment would be probably about Rs.
3,500 to Rs. 4,000 crores. Considering that the total investment in the public sector in the
three years of the First Plan did not exceed Rs. 885 crores (38.65 per cent of the target of Rs.
2,290 crores for five years), this is not too low a target to aim at in the Second Five Year
Plan. Investment in the public sector may roughly correspond to the target fixed for the First
Plan. If at the end of the five year period, the actual investment, at constant prices should be
about 70 per cent of the target, the investment in the public sector of the Second Plan would
be about 43 per cent higher than that in the First Plan.

As no plan can be bigger or bolder than the available resources, the size of the
investment programme should be reviewed periodically to ensure that it keeps within the
limits of savings. If such a review should reveal a shortage of resources it would be short-
sighted to fill the gap by credit creation or deficit financing as this will be self-defeating. A
deficiency of total real resources for development will get manifested, in the sphere of
finance, by a failure to secure finance otherwise than through an excessive creation of credit,
or deficit financing. The inability of the Plan Frame to place more than about 75 per cent of
the resources required for the Plan under the usual sources and the reliance on deficit
financing for the rest is broad evidence that the size of the plan far exceeds the available

5

savings.

The deficiency of resources, in fact, may be larger than the magnitude of the deficit
financing, as the assumed Receipts from other sources may prove to be over-optimistic. To
mention one item, it would appear exceedingly unlikely that from an average of Rs. 45 crores
per year during the past seven years, the Revenue surplus would jump up to an average of Rs.
180 crores per year in the Second Plan, the figure assumed in the Plan Frame. The available
real resources were inadequate even for the comparatively moderate First Plan. This is
reflected in the disparity between achievements and targets. Economic development is not
merely a matter of credit creation or deficit financing. Scarcity of savings manifests itself in a
scarcity of the needs of production, and in administrative and organizational difficulties,
which limit the pace of development and which credit creation cannot correct.

Indian poverty and the massive rural under-employment are conceivably the result of
a continued shortfall of savings and investments below the demographic rate (or a rate of
investment necessary to maintain per capita income undiminished with a growing labour
force). It is not to be expected that full solution of this problem would be possible in five
years. The employment potential of the First Five Year Plan has been estimated at 9 to 9.5
million persons. This is roughly equal to the natural growth in the labour force during the
period. We may presume, therefore, that with a higher rate of investment, than during the
First Plan period, the Second Plan would begin to provide relief to the underemployed in
addition to absorbing the annual increase in the labour force. The unemployment position
may be worsened if the programme of investment proving over-ambitious inflation should
develop, as this would dissipate savings, and, in due course, reduce the employment potential
of a given volume of savings.

The size of the Plan Frame has been unduly inflated as a result, on the one hand, of an
over-optimistic growth in national income, which it aims at, and, on the other, of an unduly
high average rate of saving as applied to this assumed growth in income. A much lower
figure would result if both these rates were more realistic projections of Indian experience of
the recent past. Though a certain measure of accelerated progress may result as incomes grow
and savings increase, a steep upward movement from a background in which the mass of the
people live on the margin of subsistence may not be possible except in a totalitarian regime.

II. DEFICIT FINANCING

The case for deficit financing, briefly, would appear to be that, (1 ) for “initiating a

6

process of higher investment and higher incomes by fuller utilization of unemployed and
underutilized resources” credit must be taken “in advance for the additional savings” that will
be forthcoming, in the future, from the larger incomes, and that “some initial credit creation
therefore, is an essential part of a development programme” (Paper No. 2, Section II) (2) that
“a larger money supply will be needed as the monetised sector expands relatively to the non-
monetised sector” (Paper No. 2, in Section II); (3) that a larger money supply will be needed
with an increase in the national income: (4) that, there being no current inflationary pressures
in the economy, there was no danger in undertaking deficit financing in a limited measure;
and (5) that the apparently large budgetary deficits of recent years have not produced adverse
consequences.

My colleagues have cautioned “against any tendency to undue optimism as regards
the extent to which the use of deficit financing may avoid the awkward necessity of a
deliberate endeavour to mobilise resources” (p. 4) I wish to join them in this cautioning. I
also generally agree with (2), (3) and (4) above as offering justification and scope for a
certain measure of deficit financing. With regard to (1) above, a distinction must be made
between unemployment in industrial economies and underemployment in under-developed
economies. A mistaken analogy between them has been responsible for erroneous policy
approach in under-developed economies. The problems of the two economies differed in
fundamental respects. In under-developed economies the only factor of production that was
in abundance was unskilled labour. There was a scarcity of the other needs of production
machinery, materials, and skilled personnel with the technological and managerial knowhow.
This reflected continued below the demographic rate of saving and investment. The simplest
form of investment needed some equipment and technical know-how at some stage. In
industrial economies, on the other hand, the rate of saving being generally above the
demographic rate, unemployment of labour was accompanied by unemployment or
underutilization of the complementary real resources of production. Credit creation could
bring two together. Deficit financing or credit creation here is a device of mobilizing the real
resources. We cannot seek in this a solution to the problem of development of under-
developed economies. In the latter it was a question of a scarcity of savings, for which
created money was no substitute. Under-employment in underdeveloped economies, thus,
offered no criterion for deficit financing in the way unemployment in the industrial
economies offered such criterion.

A paper on “Installed Capacity and its Utilization in Indian Industries” (Paper No. 9

7

of Section III) presented to the Panel shows that appreciable percentages of unutilized
capacity exist in a number of industries including jute, sugar, certain heavy chemicals,
machines and machine tools. It is conceivable that there may exist, in the case of some at
least of these industries, complementary skilled personnel, which are unemployed or under-
employed; there may also exist in the economy the materials of production required to
employ these personnel. The reasons for the partial idleness of the plants may vary. This
would require individual studies on these industries. In some cases it may reflect export
difficulties or competition from imports, which, conceivably, may be related to the over-
valued exchange rate. Deficit financing or credit creation cannot meet the needs of such
cases. The economic significance of this unused capacity to the total activity of even the
organized private sector would be negligible. Some of them may justify extension of credit
by the banking system or by the State Credit Corporations. They cannot be said to provide a
case for deficit financing of the public sector.

Regarding (5) the amount of the deficit financing with a monetary effect, undertaken
since August 15, 1947 to March 31, 1954 has been comparatively moderate. Excluding the
purchase of sterling by the Government in 1948 against ad hoc Treasury Bills, which had no
monetary impact, and allowance being made for the variations, in the public debt holdings of
the Reserve Bank and the commercial banks, the deficit financing of the period averaged
about Rs. 50 crores per annum. Between 1947-48 and 1953-54 the Whole-sale Price Index
rose from 308 in the former year to 435 in 1951-52 and stood at 398 in 1953-54. Part of the
rise in the price index may be due to the activation of latent inflation. But its effect could not
have lasted beyond the early part of this period. The amount of the latent inflation in India
was in any case moderate. It would seem significant that notwithstanding the moderate
amount of the deficit financing, prices continued to rise until 1951-52 and were about 29 per
cent higher at the end of the period relatively to the beginning of the period. This experience
lends support to our estimate of the magnitude of deficit financing which may be deemed safe
and necessary.

My colleagues consider that for a year deficit financing at a rate of Rs. 200 crores is
safe and even necessary and for the five-year period they would put it at within Rs. 1,000
crores. I consider these figures far too excessive. The formula on which they are based is not
known.

Deficit financing does not create real resources. Together with the issue of loans,
collection of Small Savings, etc., it is one of the devices of appropriating, for the public

sector, the real resources which exist in the economy. The necessity for deficit financing
arises from the fact that an individual converts a part of his real income into cash balance, the
rest of it being either consumed or invested (through the stock exchange or otherwise). The
cash balances, like the investments and the amounts spent on consumption, tend to grow with
the growth in income. As they form a part of the savings, there exist somewhere in the
economy equivalent real resources. Deficit financing provides the individual with the cash
balances and acquires the real resources for investment in the Plan. If the demand for the
increase in cash balances is not adequately met, prices would decline and there may ensue
unemployment. Part of the cash balances would be provided by the banking system through
the creation of credit. In this case the equivalent real resources would be acquired by the
private sector, in whose favour the banking system would create credit.

The amount of the deficit financing and the amount of the credit creation should be
together limited to the increase in the cash balances. The rate of increase in the cash balances
would depend upon the rate of increase in the Indian national product during the Five Year
Plan. An estimate of the magnitude of the credit creation and of the deficit financing under
this head would require a closer study than is immediately possible. The Bernstein Fund
Mission estimated deficit financing and credit creation by the banking system at about Rs.
33-1/3 crores per annum for the last three years of the First Five Year Plan. Assuming
constant prices, we may place it at a round figure of Rs. 35-40 crores per annum for the next
Five Year Plan. This is only a conjecture. But it indicates the order of magnitudes involved.
What part of this amount would constitute deficit financing and what part credit creation by
the banking system, would depend upon the ratio in which the increase in the cash balance
real resources of the public sector would be divided between the public and private sectors.

To the amount of the deficit financing under this head must be added the sterling
releases acquired for the public sector, to arrive at the total figure of the deficit financing that
might be safely undertaken. The total amount of the sterling releases during the five-year
period has been placed at Rs. 100-150 crores by the Plan Frame. Part of this would have to be
allocated to the private sector and will be matched by equivalent credit creation by the
banking system. If we may assume a division of the cash balance resources and the sterling
release between the public and the private sectors, respectively, in the ratio of 2:1, the order
of magnitude of aggregate deficit financing would be Rs. 180-235 crores for the five years, or
an annual rate of Rs. 35-47 crores. Post Independence Indian experience lends support to the
comparative safety of this order of magnitude of deficit financing.

9

Since the precise amount of the deficit financing is contingent upon the actual rate of
increase in the national product and the actual withdrawals from the cash reserves, both of
which may be subject to wide variation in an economy where weather conditions
significantly influence output and prosperity, it may not be prudent finance to take advance
credit for the amount of the deficit financing even if the order of magnitude were larger. The
preference of the public for cash balance may, moreover, change with their confidence in the
honesty of the rupee. Under the circumstances these sources should be held in reserve to help
meet possible shortfalls in the receipts from other sources.

I realise that this is less than cat’s meat before the order of magnitude of the deficit
financing proposed in the Plan Frame and that approved by my colleagues. But, if the above
analysis is correct, I do not see how a significantly different conclusion may be arrived at.
Even on the assumption of a doubling of the rate of growth of the national income, the
demand for the additional cash balances cannot be of an order to justify deficit financing on a
scale equivalent to 50-60% of the money supply. If a third of the central bank money
proposed to be put into circulation through deficit financing went to augment the reserves of
commercial banks, and if they built on it a volume of credit six to seven times, the total
money supply at the end of the Plan period may be more than double the money supply at the
beginning of the period. This would be clearly inflationary. An increase in the rate of growth
of national income from 13 per cent to 27 per cent would not require a doubling of the total
money supply.

Deficit financing is essential in an under-developed economy to permit full use of the
scarce real resources. By the same token, deficit financing should stop severely short of the
point at which inflation begins. Inflation does not, on balance, add to the aggregate real
resources. It creates wasteful or socially less useful demands on the limited savings.
Investment gets diverted into luxury trades to meet the demand for their products resulting
from inflation incomes. It diverts an undue proportion of savings into urban property and real
estate, into gold hoards and jewellery, and into foreign exchange, as a result of the effort of
the savers to protect the value of their savings. The resources available for the plan would be,
as a result, correspondingly less, and overall economic development would be impeded.

Inflation tends to be self-perpetuating. With the rise in price and wages, the original
estimates of the cost of the projects taken in hand will be out of date. More deficit financing
would be necessary for their completion. And, as they cannot be left half finished, there
would be a pressure for further deficit financing. At any given moment, the whole of the

10

currently available savings being invested either in the public or the private sector, or outside
the Plan, there would be no idle savings to draw upon. Real resources would have to be
drawn into the Plan by force, which would render the distortions and wastages referred to
above unavoidable. This takes away from the practical value of the caution, that the
inflationary situation should be kept under watch. Once inflation begins, it tends to gather
momentum, and while it runs its course we are apt to be more or less helpless witnesses. The
best protection against inflation is to prevent it by keeping the investment programmes within
the available real resources.

III. POLICY AND INSTITUTIONAL IMPLICATIONS

In this section we shall deal with legislative and administrative measures, taxes on
lower income groups, extension of nationalisation, continuance of controls, price support of
agricultural produce, and the proposed National Labour Force.

(i) Legislative and Administrative Measures

No plan can be bigger or bolder than the available real resources. The taxation Inquiry
Commission has estimated net savings in India at about 7 per cent of the national income in
1953-54, which is about Rs. 730 crores. This is an overall figure and, therefore, includes
savings utilised for capital formation in the organized private sector (about Rs. 75 crores),
public savings, urban savings, rural savings, and also nonmonetised savings. Other estimates
of savings are more or less of the same order. To the extent this estimate is reliable, it is a
measure of the total permissible investments in India. Any attempt to exceed this limit would
raise prices, and would impede overall economic development. Consistent with individual
freedom and democratic institutions, there is no device of significantly adding to the volume
of the flow of savings, though, with proper inducements (which should include an honest
rupee and an unpegged interest rate), it may be possible to stimulate the flow somewhat. The
situation, however, may be significantly different under a totalitarian regime, which may
impose authoritarian reductions in consumption. Overall savings, then, are no longer
dependent upon individual choices. I presume that planning in India would be consistent with
democracy and democratic institutions.

I am unable to agree to the following recommendation of my colleagues :

“It is only when there is a firm legislative and administrative base that it is possible to
think in terms of doubling the rate of progress in the Second Plan period, of increasing capital

11

formation, of raising levels of living and providing the machinery for accelerated
development in the future. We cannot, therefore, emphasise too strongly the importance of
facing up boldly and without hesitation to the legislative and administrative implications of a
bigger and a bolder plan”.

I apprehend that reliance on legislation and administrative measures to increase the
rate of saving which will permit a bigger and bolder Plan, may, by degrees undermine our
democratic social order, which would be too high a price to pay for accelerated economic
development. Legislative and administrative action should be directed to ensuring the
specially most effective uses of democratically generated savings, rather than risk undue
infringements of the liberty of the individual, without which, to quote our Prime Minister,
“We lose what is the greatest value in life”. It would appear preferable to explore the scope
for more ample but unicumbered, foreign aid and foreign loans and a larger flow of
unicumbered foreign private capital to supplement domestic saving for accelerated economic
development. In view of the vast scope of profitable investments, this would be imminently
worth-while, the net profits of the projects may be expected more than to cover the
amortisation of the foreign capital within a reasonable period. Economic history does provide
instances of national economic development being financed by foreign capital in the early
stages with no loss or sacrifice or sovereignty.

(ii) Taxes on Lower Income Groups

There is hardly room for a further reduction in the standard of living of the lower
income groups in India. Finance for the Plan must be raised from the middle and the upper
income groups. Measures of taxation and other devices, which would tend to reduce further
the consumption of the lower income groups, should be avoided. I am unable, therefore, to
agree to my colleagues’ recommendation to amend Article 286(3) of the Constitution in order
to permit taxation of articles “essential to the life of the community”. Amendments to the
constitution which should be rare, should much rather be in the direction of adding to the
liberties, privileges and rights of the common man than otherwise.

(iii) Extension of Nationalisation

I agree with my colleagues that the scarcity of administrative and specialised
personnel, and the necessity of conserving savings for the plan are factors against extension
of nationalisation. But they have no objection for such extension on principle. I would oppose

12

general extension of nationalisation on principle. Nationalisation should be ordinarily limited
to public utility concerns and to concerns, involving national security. Otherwise, State
intervention should be concerned with the prevention of monopolies or quasimonopolies.
Efficient management of business and industrial concerns in a competitive market economy
is a highly specialised function and demands qualities which a civil servant is not required to,
and in the ordinary course of his training may not, acquire. This function is best left to private
entrepreneurs, in the prevailing socio-economic order, which is dominated by the market
economy and the pricing system.

(iv) Continuance of Controls

I do not feel convinced of the economic importance of continuing the remnants of
controls. Decontrols have proved a noteworthy success. Controls and physical allocations are
not a necessary adjunct to planning. The distribution of productive resources, including the
ratios in which they are used, are subject to variation and depend upon diverse technological,
economic and price considerations. It is quite impossible to take into account these complex
and changing considerations and arrange anything like a satisfactory allocation of resources.
There are great advantages in allowing freedom to the economy, and to the price system in
the use and distribution of the needs of production. I am unable to agree with my colleagues
that a case exists for continuing what controls now remain. Steps should be taken to remove
controls as early as may be possible. Controls and allocations are an essential characteristic of
communist planning. They do not very well fit in, under planning in a free enterprise market
economy.

(v) Price-support of Agricultural Produce

I wish to join my colleagues in the matter of the urgency and importance of
completing speedily the scheme for licensed ware-houses, and for the provision of credit and
marketing facilities to farmers. My colleagues have stated that the ware-housing system
“should be used by the State for purchase and sales of buffer stocks of agricultural
commodities not only for the purpose of dealing with any sharp falls in agricultural prices
such as we are witnessing today but also with the objective of preventing any sharp seasonal
fall or rise in prices”.

In theory it may be possible to distinguish between seasonal price movements from
the long-term price trends, and to prescribe that seasonal fluctuations should be smoothed out

13

by State purchases in times of harvest and sales between harvests. In practice, however, such
distinctions may prove to be difficult and seasonal interventions may turn into long-term
price support operations.

Price support of agricultural produce in India is a risky venture and we should be
forewarned of the inherent dangers of it. About 50 per cent of Indian national income is
drawn from Agriculture. A policy of price support is, in essence, a subsidy, by the rest of the
community to the producers of the price supported commodity In countries, where agriculture
is a minor sector of the national economy, the incidence of the subsidy may be spread out
thinly on the larger sector of the economy and the proceeds may provide substantial relief to
farmers. The reverse would be the case in India. The strain of the subsidy will manifest itself
in a shortage of budget resources for the open market purchase and storage of agricultural
produce. This, in due course, would lead to either abandonment of the price support policy or
inflation. In either case damage would result. If the dilemma does not appear in one season, it
is likely to come in the next, as successful price support would stimulate production. In the
Indian context, a policy of price support of agricultural produce may force the economy down
the inclined plane of inflation. Even in the United States, where agriculture is a minor sector
of the national economy, price support has only survived. It has not succeeded. It has led to
undue stockpiling of agricultural commodities and, in the past, had involved a great deal of
wastage of stocks through deterioration. Selective price support policy is a poor answer to
this difficulty. The distinction between crops would be invidious, the relief provided may
prove to be a token, and it might cause a distortion in the pattern of agricultural production
and economic instability.

The price situation in India today was too complex to be resolved by price support of
agricultural commodities or other inflationary measures such as a deficit financing. The price
decline was neither universal nor uniform. The prices of some major commodities had moved
in opposite directions. The fall was heaviest among foodgrains, oilseeds, and black pepper.
Some agricultural produce, e.g., tea, raw hides and lac, which were export goods, and raw
jute, among import goods, had risen almost as high as some other agricultural prices had
fallen. The prices of manufactures were either steady or showed a slight upturn on the
average. The cost of living index was either steady or had fallen only slightly. In a
background of dissimilar price movements, simple monetary remedies may aggravate the
complexity and difficulty of the price structure. It may, on balance, adversely affect the
employment position by stiffening the already rigid cost structure. Price support and deficit

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financing were no remedies to individual over-production, and to export difficulties which
are attributable to quality and to domestic costs or exchange overvaluation. Price support and
deficit financing might, in fact, aggravate these maladies.

The complex problems of the prevailing price situation emphasise the importance of
economic rationalisation, for progress with stability, whereby the fiscal, the investment, the
monetary, the interest rate, the tariff, and the exchange rate policies are rendered mutually
consistent and harmonious.

(vi) National Labour Force

I apprehend more risks than I see advantages in the proposed National Labour Force.
It may create a privileged class of workers, who may prove to be relatively more expensive to
keep and to move. The availability of this force may impede relief to the regional
underemployment problems. The necessity for such a force may not arise until labour
becomes a bottleneck in economic development.

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